The Willful Failure to Collect or Pay over Tax

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Section 7202 of the Internal Revenue Code provides that it is a federal crime to (1)  willfully fail to collect a tax or (2) willfully fail to truthfully account for and pay over a tax.  Section 7202 charges often involve employment tax violations, although such violations may be charged as violations of other statutes such as 26 U.S.C. § 7201 (tax evasion), 26 U.S.C. § 7206(1) (false returns), 26 U.S.C. § 7212(a) (obstruction), and 18 U.S.C. § 371 (conspiracy to defraud).

 

Taxes that are withheld and that are required to be paid to the United States are commonly referred to as “trust fund taxes.”  A person who is responsible for collecting and paying “trust fund taxes” to the United States and who willfully fails to do so may face charges under section 7202.  FICA taxes and income taxes are common “trust fund taxes” in this context.  Employers have an obligation to withhold employee FICA and income tax from the wages paid to their employees, and to pay over the withheld amounts to the United States.  26 U.S.C. §§ 3102(a) (imposing on employer duty to collect employee’s share of FICA), 3102(b) (imposing on employer duty to pay over employee FICA), 3402 (imposing on employer duty to withhold income taxes from employee’s wages), 3403 (imposing on employer duty to pay over income taxes required to be withheld from employee’s wages).  The government takes the position that the obligation to pay over the required amount exists whether the amount is actually withheld from wages or not.  See United States v. Simkanin, 420 F.3d 397 (5th Cir. 2005) (responsible person’s § 7202 convictions based upon failure to collect).

Section 7202  provides as follows:

I.R.C. § 7202 – WILLFUL FAILURE TO COLLECT OR PAY OVER TAX

Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined* not more than $10,000, or imprisoned not more than fie years, or both, together with the costs of prosecution.

Thus, in order to establish a crime under section 7202, the government must prove the following elements beyond a reasonable doubt:

[1] A duty to collect, and/or to truthfully account for and pay over;

[2] Failure to collect, or truthfully account for and pay over; and

[3] Willfulness.

The Duty to collect, and/or to truthfully account for and pay over taxes.

Employers have a duty to truthfully account for and pay over taxes under I.R.C. §§ 3102(s), 3111(a), and 3402.   Notably, courts determine whether an individual has the duty to collect and/or truthfully account for and pay over taxes using criteria that are typically used under section 6672 of the Internal Revenue Code, which provides for the so-called trust fund recovery penalty.  See our prior posts (for example, herehere, and here) on the subject for more information.

A non-exhaustive list of factors that the government uses to determine whether an individual or individuals has the duty to collect, account for, and pay over include the following:

  1.  the duties of the person as outlined by the employer’s by-laws;
  2. the ability of the individual to sign checks on behalf of the employer or to otherwise determine which creditors to pay and when to pay them;
  3. the signature on the employer’s federal employment or other tax returns;
  4. the identity of the employer’s officers, directors, and owners (e.g., shareholders, partners);
  5. the identity of the individuals who hired and fired employees; and
  6. the identity of the individuals who were in charge of the financial affairs of the employer.

Willfulness

The element of willfulness under section 7202 is the same element that applies to other offenses under title 26. Willfulness is defined as the “voluntary, intentional violation of a known legal duty.”  Please see our prior posts for more background on the concept of willfulness (for example, here and here).

For more on tax crimes, visit our other resources, such as The Crime of Tax EvasionTax Evasion: Attempting to Evade the Assessment of Taxes, or Tax Evasion: Evading the Payment of Tax.

 

White Collar Defense Attorneys

 

Freeman Law represents companies, executives, and individuals in regulatory and white-collar government investigations and prosecutions. We employ a proactive approach to defend vigorously and strategically position our clients. White-collar matters often involve parallel regulatory and civil proceedings. Freeman Law can navigate the complexities and collateral consequences of multiple proceedings. And when it comes to the court of public opinion, we employ ethical and strategic tactics to manage publicity. Schedule a consultation or call (214) 984-3410 to discuss your allegations and investigations concerns.

 

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